Reinsurance Regulation

IAIS PROPOSES REVISIONS TO INSURANCE CORE PRINCIPLE 13 ON REINSURANCE

June 12, 2017 by Rob DiUbaldo

The International Association of Insurance Supervisors (“IAIS”) recently released proposed revisions to the existing version of its Insurance Core Principle 13 regarding “Reinsurance and Other Forms of Risk Transfer.” The proposal involves a fairly significant re-working of the structure of certain ICP 13 sections, as well as important substantive updates. At the outset, the proposal would revise the description of what ICP covers, from supervisors “set[ting] standards” for the use of reinsurance and other forms of risk transfer in order to ensure that insurers adequately control and transparently report their risk transfer programs, to supervisors “requir[ing] the insurer to manage effectively” its use of reinsurance and other forms of risk transfer. Other noteworthy changes include (but are not limited to):

inserting a list of factors to inform a supervisor’s assessment of a ceding insurer’s reinsurance program;
recommending the group-wide supervisor of an insurance group require the reinsurance strategy of the insurance group to address a designated set of issues;
specifying supervisors require ceding insurers to establish effective internal controls over the implementation of their reinsurance program;
including credit risk posed by a reinsurer (and ways for ceding insurer to mitigate reinsurer credit risk), as well as operational risk related to contract documentation, as characteristics of the reinsurance program that should be included in a ceding insurer’s capital assessment;
requiring ceding insurers to demonstrate the economic impact of risk transfers originating from reinsurance contracts (as opposed to requiring transparency to allow the supervisor to understand the economic impact);
eliminating statement that binding documentation requirements are questions of jurisdictional contract law;
requiring ceding insurers to consider the impact of their reinsurance programs in liquidity management (as opposed to the supervisor assessing whether cedants control their liquidity position to take account of risk transfers); and
inserting a section regarding considerations for supervisors of insurers ceding risks to SPEs.

The IAIS held a public background call on June 5, 2017 to introduce the public consultation package and to receive initial feedback. Interested parties may submit feedback on the proposed revisions to the IAIS online through July 31, 2017.

This post written by Thaddeus Ewald .
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UPDATE ON LIQUIDATION OF THE HOME INSURANCE COMPANY

May 17, 2017 by Michael Wolgin

The New Hampshire liquidation court approved the commutation, settlement, and release agreement between The Home Insurance Company (liquidating) and OIC Run-Off Limited (formerly known as The Orion Insurance Company) (OIC) and The London Overseas Insurance Company Limited (formerly known as The London and Overseas Insurance Company Plc) (L&O). As the motion for approval of the agreement explained, “[t]he Agreement is unusual in that the Liquidator is seeking to collect from insurers that are themselves insolvent and in insolvency proceedings in London under English law.” For example, the agreement is governed by and construed in accordance with English law and is subject to the exclusive jurisdiction of the High Court of Justice of England and Wales. The commutation agreement was approved March 13, 2017 and provides for the commutation of all of Home’s ceded and assumed business to or from OIC and L&O, as well as the resolution of all of OIC’s and L&O’s contribution claims against Home. A redacted copy of the commutation agreement, with economic terms removed, was filed with Home’s motion for approval. In re Liquidation of The Home Insurance Co., Case No. 217-2003-EQ-00106 (N.H. Sup. Ct. Mar. 13, 2017) (Order Approving Commutation); Motion for Approval (Feb. 6, 2017).

This post written by Gail Jankowski.

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MCCARRAN-FERGUSON ACT PROHIBITS PURSUIT OF RICO CLAIMS AGAINST INSURER

May 8, 2017 by John Pitblado

A Plaintiff annuity holder was prohibited from pursuing her federal racketeering claims against an insurance company and its affiliates, as doing so would impair state regulation of insurance business, contrary to the McCarran-Ferguson Act.

The question addressed by the Eighth Circuit Court on appeal of the dismissal of Plaintiff’s RICO claim, was whether the RICO charge would impair state insurance regulation. Applying the standard set forth in Humana Inc. v. Forsyth, 525 U.S. 299 (1999), the Court focused on the precise federal claims asserted. Here, it was Plaintiff’s claim the insurer “misrepresented the true financial conditions of the company in its public reports and marketing materials, artificially inflating its purported assets and surplus.” Ruling on those claims would require the Court to decide whether the purported sham transactions left the insurer in the “healthy financial position it reported” or whether Plaintiff was correct that “a proper accounting would have shown liabilities substantially exceeding” the insurer’s assets.

As questions about an insurer’s solvency are “squarely within the regulatory oversight by state insurance departments” a federal court could not rule in Plaintiff’s favor without holding “that state insurance regulators were wrong” – essentially “double-checking” the regulator’s work. Such a result runs contrary to the McCarran-Ferguson Act.

Ludwick v. Harbinger Group, Inc., No. 16-1561 (8th Cir. April 13, 2017)

This post written by Nora A. Valenza-Frost.

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PUTATIVE CLASS ACTION INVOLVING A PATENTED REINSURANCE ARRANGEMENT FOR WORKERS’ COMPENSATION COVERAGE LARGELY SURVIVES DISMISSAL

April 25, 2017 by Michael Wolgin

The case is pending in a federal district court in New York, and involves three allegedly interconnected contracts purportedly “designed to circumvent [state] insurance laws,” including the laws of New York. The three contracts include: (1) a workers’ compensation insurance contract between a licensed insurer and an insured; (2) a reinsurance contract between the licensed insurer and an affiliated reinsurer; and (3) a “reinsurance and profit sharing” contract between the reinsurer and the insured. The plaintiffs (insured employers) allege that the “reinsurance and profit sharing” contract was an illegal contract of insurance that modified the workers’ compensation insurance contract issued by the licensed insurer. The plaintiffs also claim that the “reinsurance and profit sharing” contract was materially misleading, and misled insureds to assume liability for a portion of the losses they believed they had insured. Additional claims asserted by the plaintiffs include breach of contract, rescission, violation of New York law prohibiting deceptive trade practices, and unjust enrichment. The defendants (various alleged members of the Berkshire Hathaway Group) moved to dismiss the complaint for failure to state a claim.

In a lengthy opinion, the court granted in part and denied in part the motion to dismiss. Regarding claims for rescission based on alleged violations of the New York Insurance Laws governing workers’ compensation insurance, the court granted dismissal, reasoning that enforcement of those laws rests with the Superintendent of Insurance and that no private right of action exists. The court permitted claims for rescissory damages to proceed however, as reimbursement of amounts charged and paid over and above the filed rates of the policies is contemplated by New York law and “promotes the legislative purpose of the NYIL to ensure that parties adhere to filed rates.” The court also held that the claims for breach of contract (based on plaintiffs’ contention that the reinsurance and profit sharing contract modified the workers’ compensation insurance policies) and unjust enrichment, should survive dismissal. As to the claims for deceptive trade practices, the court held that for certain named plaintiffs, the claims were time-barred, but for other plaintiffs, the claims could proceed. National Convention Services, L.L.C. et al. v. Applied Underwriters Captive Risk Assurance Co., Inc., et al., Case No. 15-cv-07063 (USDC S.D.N.Y. Mar. 9, 2017).

This post written by Michael Wolgin.

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APPELLATE COURT PRECLUDES ASSIGNEE OF REINSURANCE CLAIMS FROM RE-LITIGATING LACK OF ENTITLEMENT TO ARBITRATION

April 24, 2017 by Michael Wolgin

In 1986, Pine Top Insurance Company became insolvent and was placed into liquidation. The liquidator eventually sold Pine Top’s accounts receivable, including reinsurance claims, to an entity named Pine Top Receivables of Illinois, LLC. In 2015, Pine Top Receivables sued Transfercom, Ltd. to collect on an assigned reinsurance claim and sought to compel Transfercom to arbitrate the claim pursuant to the underlying reinsurance agreement.

Several years earlier, Pine Top had unsuccessfully sued a Uruguayan entity in a federal district court in Illinois, and similarly sought to compel arbitration. That court and the Seventh Circuit Court of Appeals determined that Pine Top Receivables had no right to enforce the arbitration clause in the reinsurance contract because, among other reasons, the assignment of the reinsurance claims from the liquidator conveyed only the right to collect the debt but did not convey the contractual right to demand arbitration.

In the current litigation, Transfercom argued that the Seventh Circuit’s decision collaterally estopped Pine Top Receivables from relitigating the issue of whether it was entitled to demand arbitration with respect to the assigned reinsurance claims. The trial court agreed with Transfercom and denied Pine Top’s motion to compel. And on appeal, the court affirmed the judgment of the trial court. The appellate court reasoned that the earlier case resolved on the merits the issue of whether Pine Top Receivables was entitled to demand arbitration of claims assigned to it by the liquidator. The appellate court further explained that once the Seventh Circuit resolved the arbitration issue in Pine Top Receivables’s interlocutory appeal in the earlier litigation, the issue could not be revisited and the judgment on that issue was final. Pine Top Receivables of Illinois, LLC v. Transfercom, Ltd., Case No. 15 L 009145, (Ill. App. Ct. Mar. 31, 2017).

This post written by Gail Jankowski.

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